Chaebol leaders under scrutiny following law revision

A newly revised law in South Korea will see the chiefs of major family-controlled conglomerates, known as chaebol, come under examination as lawmakers look to ensure the stability of their financial subsidiaries, officials said this week.

A newly revised law in South Korea will see the chiefs of major family-controlled conglomerates, known as chaebol, come under examination as lawmakers look to ensure the stability of their financial subsidiaries, officials said this week.

The move comes nearly three years after the Tongyang Group, then the 38th largest chaebol in South Korea, declared bankruptcy after inappropriately selling commercial paper and corporate bonds, causing damages to the tune of ₩2 trillion ($1.87 billion).

As a result nearly 40,000 small investors found themselves out of pocket while the chairman of Tongyang Group, Hyun Jae-hyun, was sentenced to 15 years in jail – an outcome that would have been avoided if the chaebol was subject to the same laws as other financial institutions.

Under the revised law, which was previously levied at banks and mutual savings funds, chaebols will be subject to the same laws as other financial institutions, while the controlling shareholder could see their voting rights restricted for up to five years if they are found to have violated financial law. Lawmakers hope this will reduce the risk to investors.

The Financial Services Commission in turn announced this week that it would look retroactively into the controlling shareholders of Korean financial companies under the revised law for alleged discretions.

According to the Korea Herald, the heads of 64 financial firms including Samsung Life Insurance, Hanwha Life Insurance, Hyundai Capital Services, and Mirae Asset Daewoo will face the eligibility screening.

The most notable leaders under investigation include Samsung Group chairman Lee Kun-hee, who was embroiled in a media scandal this month after allegedly being videotape paying for sex, and Hyundai Motor Group chairman Chung Mong-koo.

While the revised law is aimed specifically at financial institutions, there is a wider legislative drive in South Korea to uproot unfair business practices perpetrated by family-run conglomerates to limit the power of their owners.

The review by the Financial Services Commission is expected to be completed by May next year, and will take place every two years thereafter to discover whether there has been any change to the ownership structure.

In situations where ownership is more complicated – a recent report found that tycoons of Korea’s top 10 conglomerates control their empire with less than 1% equity – the corresponding institution will be required to reveal their true majority shareholder by the end of February next year.

South Korea’s family-owned conglomerates dominate the nation’s economy, with the largest 10 accounting for more than half of the nation’s total stock market capitalisation, according to a report released by corporate tracker CEO Score.